The performance and replication success of synthetic hedge funds

What is it about?

We study the performance and the replication success of 72 synthetic hedge funds from January 2009 to December 2013. “Synthetic hedge fund” are funds and exchange-traded funds with hedge fund indices as their benchmarks. We find an overall significant underperformance of synthetic hedge funds compared to an appropriate benchmark index.

Featured Image

Why is it important?

With the drop of global base rates to a historical trough, many investors have to cope with negative real interest rates. This specifically affects institutional investors such as endowments, pension funds, and insurance companies, which are typically committed to long-term agreements that have been entered at times when interest rates were on higher levels. Consequently, institutional investors are searching for alternatives to traditional investments in order to achieve the returns needed to fulfill their obligations. Hedge funds have received noticeably increased attention in recent years. However, hedge funds are rather nontransparent, charge relatively high management fees compared to traditional mutual funds and commonly require lock-up periods. Synthetic hedge funds claim to be more transparent and more liquid than hedge funds while they contain no manager-specific risk. As empirical evidence on the performance of these products is weak due to their short history, the present study sheds light on several aspects of synthetic hedge funds and extends previous research.